The report says the Foreign Account Tax Compliance Act is not, contrary to received wisdom, merely an operational issue, but adds that it impacts on strategic issues that “only boards and senior executives can address”. Such concerns extend across product, market and distribution strategy, the make-up of funds and legal entities and business models themselves.
“The strategies adopted will bear on matters of pricing, margin and risk”, it advised.
FATCA, which will require details of US clients with assets in excess of $50,000 to be passed to the US Internal Revenue Service, comes into force on 1 January 2013. Institutions that do not comply will be subject to a 30% withholding tax on all payments made to them in the US, but many are underprepared, according to KPMG.
“Unless implementation is postponed, we believe that the correct answer to the question of when preparations for FATCA should begin is ‘six months ago’”, the report warned.
The study of leading fund promoters across 12 countries revealed that just 32% of respondents said they will be ready in time for the 1 January 2013 implementation date, with 42% of firms having not yet assessed the time required to implement FATCA.
Some 45% of fixed income funds and 42% of equity funds refused to rule out the possibility of leaving the US market as a result of the legislation, though 36% and 42% respectively said they would not disinvest from the US.
Investor information
The report noted that 39% expect to change their distribution model as a result of FATCA – but cautioned that some 39% of respondents do not currently have access to information regarding the names and addresses of end investors at the transfer agent level.
Just 20% say they are already able to identify all US source income collected in their funds; the proportion who say they have already integrated the exclusion of US investors into distribution agreements stands at 26%. On product strategy, 32% expect “some level of change” to the structure of their product range.
While the report noted that the Internal Revenue Service foresees FATCA requirements being eased for funds that minimise sales to US investors, it cautioned that attempting to restrict US customer numbers will prove challenging, not least in organising all distributors in order that they conform with such practices.
“Significant legal issues may arise in trying to exclude US investors. It has also to be noted that current sales restrictions are based on SEC rules. While there are some commonalities, the category of US taxpayers is far more extensive, which itself makes the design of a new process unavoidable,” KPMG added.
While the report outlines the significant challenges funds face in identifying US investors, the task of identifying non-US investors will be necessarily greater: “it appears that the rules currently proposed would require non-US taxpayers in effect to prove a negative in demonstrating their status.”
Issues over identifying clients are particularly notable in cases such as that where fund sales are conducted through intermediaries, according to the report – a concern of particular relevance to the UK market.
